659 F.3d 1 (D.C. Cir. 2011), 10-5321, S.E.C. v. Whittemore
|Citation:||659 F.3d 1|
|Opinion Judge:||ROGERS, Circuit Judge:|
|Party Name:||SECURITIES AND EXCHANGE COMMISSION, Appellee v. David E. WHITTEMORE and Whittemore Management, Inc., Appellees Peter S. Cahill, Appellant.|
|Attorney:||Russell G. Ryan argued the cause and filed the briefs for appellant. Nicholas J. Bronni, Attorney, Securities and Exchange Commission, argued the cause for appellee Securities and Exchange Commission. With him on the brief were Jacob H. Stillman, Solicitor, and Hope Hall Augustini, Senior Litigat...|
|Judge Panel:||Before: SENTELLE, Chief Judge, ROGERS and BROWN, Circuit Judges.|
|Case Date:||October 28, 2011|
|Court:||United States Courts of Appeals, Court of Appeals for the District of Columbia Circuit|
Argued Sept. 16, 2011.
[Copyrighted Material Omitted]
Appeal from the United States District Court for the District of Columbia (No. 1:05-cv-00869).
As part of a civil enforcement action brought by the Securities and Exchange Commission, the district court entered a disgorgement order against Peter S. Cahill imposing joint and several liability for the full proceeds of his sales of stock in a small, thinly traded corporation not listed on a major stock exchange. Cahill challenges the order principally on the grounds that the district court's disgorgement calculation was clearly erroneous in failing to account for a pre-fraud value of 32 cents per share; the disgorgement order was impermissibly punitive because it imposed liability for funds he had transferred to co-defendants; and the district court also abused its discretion in fashioning an equitable remedy by imposing joint and several liability when there was no close relationship between the defendants and apportionment was warranted.
The allegations in the complaint and evidence presented by the Commission showed that there was no reliable pre-fraud fair market value for the shares. Cahill waived his right to contest the allegations in the complaint, and he asserted his Fifth Amendment right not to introduce evidence that might incriminate him. Consequently, because Cahill presented no evidence in rebuttal, the district court did not clearly err in finding that the Commission had met its burden to show that his ill-gotten gains were the full proceeds of his stock sales at inflated prices resulting from a fraudulent " pump and dump" scheme. Neither did the district court abuse its discretion in crafting the disgorgement remedy. Inclusion of the transferred funds was consistent with our precedent. Absent any rationale for a different approach, we join other circuits in holding that the imposition of joint and several liability for the amount ordered to be disgorged does not require proof of a close relationship among the defendants beyond their collaboration in the fraudulent scheme in violation of the securities laws. Accordingly, because Cahill's evidentiary objections are also unavailing, we affirm the order of disgorgement.
Pursuant to 15 U.S.C. § 78u(d)(5) (2006),1 " the Commission may seek, and any Federal court may grant, any equitable relief that may be appropriate or necessary for the benefit of investors." Section 78j(b) of Title 15, 15 U.S.C. § 78j(b) (2006), (" Section 10(b)" ) provides that it is unlawful for any person to " use or employ ... any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors." The Commission's regulations at 17 C.F.R. § 240.10b-5(c) (2010) (" Rule 10b-5" ) provide that it is unlawful to " engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security."
This case arises from Cahill's alleged participation in a " pump and dump" scheme through which he sold a substantial number of shares in an energy company's stock at fraudulently inflated prices. Cmpl. ¶ ¶ 1, 13. On May 3, 2005, the Commission filed a civil enforcement action
against Cahill and others (" the Whittemore defendants" ) seeking to permanently enjoin them from engaging in this conduct in violation of Section 10(b) and Rule 10b-5, and to disgorge their ill-gotten gains. According to the complaint, in July 2004, Cahill, who had acquired a substantial number of the outstanding shares of Triton American Energy Corporation (" Triton" ), contacted David E. Whittemore, the owner and sole employee of a voicemail marketing firm, to engage his services in transmitting voicemail messages touting Triton's stock. Cmpl. ¶ ¶ 11, 12. Triton is quoted on the Pink Sheets, a trading system that lists small companies that do not meet the requirements of the major stock exchanges. Cmpl. ¶ 9. The complaint alleged Cahill transferred to Whittemore 594,000 Triton shares " for his services," but Whittemore returned them to Cahill in exchange for $142,000. Cmpl. ¶ 11. In August and September 2004, Whittemore broadcasted false and misleading voicemail messages about Triton purporting to be left by accident on the recipient's answering machine. Cmpl. ¶ 12. Prior to the fraud, Triton stock had last traded at 32 cents per share with a trading volume of 10,000 shares on August 6, 2004. Cmpl. ¶ 13. As a result of the fraud, Triton shares reached a high of 97 cents per share with 756,000 shares traded on August 19, 2004. Cmpl. ¶ 13. Cahill sold 680,800 shares between August 23 and September 14, 2004, generating gross proceeds of $508,056. Cmpl. ¶ 14. Whittemore was also charged with similar misconduct regarding another company unconnected to Cahill and Triton. Cmpl. ¶ ¶ 15-17.
By a consent to entry of judgment, Cahill agreed that the allegations of the complaint were true for purposes of the Commission's motion for disgorgement. See Consent Def. Peter S. Cahill (Jan. 21, 2009 (" Cahill Consent" )). He also agreed that for purposes of the disgorgement proceeding, " the [c]ourt may determine the issues raised in the motion on the basis of affidavits, declarations, excerpts of sworn depositions or investigative testimony, and documentary evidence, without regard to the standards for summary judgment contained in Rule 56(c) of the Federal Rules of Civil Procedure." Id. ¶ 3. He otherwise asserted his Fifth Amendment right not to present evidence that might incriminate him. The district court entered a judgment against Cahill on liability based on his consent, with a disgorgement proceeding to follow. SEC v. Whittemore, 691 F.Supp.2d 198, 200 (D.D.C.2010). Whittemore, on behalf of himself and his company, also consented to liability for the conduct alleged in the complaint.
In support of its motion for disgorgement, the Commission filed two declarations and a transcript. Andrea Bellaire, a Commission senior counsel, declared that the proceeds of the fraud were distributed through a lawyers' trust account (" IOLTA" account) on the authority of an attorney, Phillip W. Offill. Decl. Andrea Bellaire ¶ 8, Apr. 9, 2009. Bellaire stated that in August 2004, Cahill transferred 594,000 shares of Triton stock to Whittemore " in advance for his services," id. 12, which Whittemore later returned to Cahill in exchange for a payment of $92,000 plus an additional $50,000 for associated costs. Id. ¶ ¶ 12-14. Bellaire estimated that Cahill's proceeds from his sale of over one million Triton shares were $738,473. Id. ¶ 20. She stated that Cahill wired $549,300 into the IOLTA account, and that those funds were credited to Whittemore. Id. ¶ 21. Bellaire also stated that one of Cahill's attorneys wired an additional $78,500 to the account of Tracy Whittemore, David Whittemore's wife, in April 2005. Id. ¶ ¶ 27-29. Robert W. Lowry, a forensic securities expert, declared that " during the
five weeks prior to August 18, 2004," the closing price for TRAE (Triton's trading symbol) " ranged from a low of $0.32 per share to a high of $0.50 per share," characterizing the stock as " thinly traded" and stating there was trading volume on only five of these days, totaling 22,200 shares. Decl. Robert W. Lowry ¶ 8, Apr. 3, 2009. Once the fraudulent voice messages began, Lowry explained, Titron's trading volume spiked, exceeding 750,000 shares on one day, and the stock traded in a price range from $0.50 to $1.50 per share. Id. ¶ 9. Lowry also provided details on the $549,300 Cahill wired to the IOLTA account for Whittemore, id. ¶ 14, as well as other information on Triton's trading price and volume, id. Ex. 1.
The transcript offered by the Commission was of testimony of Louis N. Guidry, taken on July 28, 2005, before the Texas State Securities Board. Guidry had testified under oath that in May 2004, Cahill approached him with a proposal: If Guidry agreed to purchase for $6,000 or $7,000 Cahill's publicly traded shell company, MilitaryCollections.com, Inc., the name could be changed to Triton American Energy Corp., Guidry would be the President and CEO, and Cahill could raise money for Guidry's oil and gas exploration efforts. See Guidry Tr. 8-11, Jul. 28, 2005. Guidry agreed, and Cahill engineered a reauthorization for the issuance of 100 million public shares, taking as his fee 1.2 million of those shares. Guidry claimed that he had " no idea" why Cahill transferred 594,000 shares to Whittemore, nor why Cahill wrote Whittemore a check for $92,000. Guidry Tr. 31-32. Guidry professed ignorance of any scheme to pump up Triton's share price. Id. at 34.
The Commission argued that Cahill's cost basis for the Triton shares was zero, and that it had satisfied its burden to show a reasonable approximation of the profits causally related to the fraudulent " pump and dump" scheme by proving the gross proceeds from Cahill's sales of the shares. Noting it " had virtually no discovery from [the defendants] on these matters," Mot. Hr'g. Tr. 6, Dec....
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